For over half a century I have worked as an investment banker, and then written about Wall Street, highlighting the market upheavals of 1973-4, 1987, 1999-2000, and 2007-2008 and their ramifications for the American economy,the disparity of wealth in the nation and the continuing risks of another deep global financial crisis.

Previously I was National Editor and Senior Editor at Forbes Magazine, New York Bureau Chief of The Boston Globe and Wall Street correspondent of The Economist.

The Price Of Oil Is The New Economic Spoiler

The charts below — provided by Ruchir Sharma, Morgan Stanley Head of Emerging Markets and Global Macro — prove without a doubt that rising oil prices due to QE1 and QE2 act like rising interest rates– and stall the economy into recession.

“Oil has become the new interest rate, capping growth when central banks insist on flooding the system with liquidity,” says Sharma in his riveting diatribe against QE3 from Ben Bernanke‘s central bank. “Inflated prices for commodities like oil carry the seeds of their own destruction, because the higher they rise, the more likely they are to stall the economy,” Sharma adds. In other words, when the Fed increases the money supply it is similar to the past times when the Fed hiked interest rates in order to slow the economy down — even if it meant recession.

Lesson Number One: During the run-up to QE1 in 2008, when the Fed was reducing interest rates and pouring money into the system to stabilize Wall Street– and hopefully fire up economic activity– the price of crude oil soared to over $140 a barrel and economic activity fell about 8%, causing the major stock market average — the S&P 500 index to tumble from a peak of 1500 over 50% to 700. And, in reaction to the recession that followed, the price of oil tumbled from $140 a barrel to $40 a barrel — a tremendous 70% decline.

Sharma calls the the rising price of oil as a share of personal consumption “demand destruction for the US consumer; when oil hit $140 a barrel, people reduced their driving which reduced the demand for gasoline, which in turn reduced the price of crude oil.” Just as when Fed Chairman Paul Volcker significantly raised interest rates from 1979 to 1981 in order to crush double-digit inflation, we experienced a terrible slowdown.

Lesson Number Two: QE 1 and QE 2 boosted the wealth of upper income groups because the stock market rose and the wealthiest benefited since 75% of all common stocks are held by 10% of the population. Thus, in 2009, the lowest income groups had to spend 41% of their after-tax income on gasoline and food — cutting off the ability have much discretionary income left over. The top income brackets only spent 2% of their incomes on gasoline alone — less than a quarter of the poorest segment.

Lesson Number Three: when the price of oil reached 10% of global gdp from 1976-80, America suffered enormously. But, when oil was only 2%-4% of gdp in the 1990s the Clinton economy created 23 million new jobs. Look at the chart for 1973-79 when the price of oil quadrupled and you will see that oil as a share of gdp rose to 9.5% from 6%. Enter double digit inflation.

What’s today’s lesson. Crude oil in the US is back up to $96 a barrel in the light of an extraordinary rise in the volume of trading in energy futures. The speculators are betting big time on QE3 damaging the dollar, driving up the price of oil– and putting us back in another recession in 2013. So far in 2012 futures trading is running at the shocking level of 25.2 times world demand for energy. This compares to 14.7 times in 2008 when crude oil hit $147 a barrel, and George Soros went short. Sharma is showing us what his hedge fund clients are doing and it is not beneficial for anyone below the wealthiest segment of the nation.

Hedge fund giant Ray Dalio of Bridgewater Associates warned today at a Council on Foreign Relations session that he was not bullish on oil going forward. He also warned in periods when deleveraging is a powerful factor, history can often repeat itself by means of another decline in stock prices that is not necessarily expected by investors who are not aware of past patterns of economic behavior. An example; higher oil prices shut off growth and lead to a worse economy and a weak stock market. Or, there can be events that are never expected until they occur, like a 9/11 or an attack on Iran by Israel.

The most expected event– the declaration of more quantitative easing– another $85 billion of bond buying a month and zero cost of money into 2015, almost 3 years away– should give the price of gold a lift and possibly push government bond and yield stocks higher. To be fair and blunt the political unrest in the Middle East will have more to do with pushing oil prices higher than monetary policy for the time being.

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Your first lesson is based in part on an error. You state: “During QE1 in 2008 the price of crude oil soared to over $140 a barrel.” According to the sources I can find, QE1 took place from Nov. 25, 2008 to March 31, 2010. But the price of oil rose to over $140 a barrel in July of 2008 (just over $147, to be exact, on July 11, 2008). It had already crashed to under $50 a barrel by November 20, 2008, five days before any quantitative easing took place. So while I agree completely with your premise that high oil prices have a serious and unfortunately often overlooked effect on the economy, I must vigorously object to your explanation that the rising prices in 2008 were caused by quantitative easing. Unless there is some kind of time warp in operation. Which I doubt. Do you have an alternative explanation?

Yep… lesson #1 is such an egregious mistake… why should we bother reading the rest?

Regarding today’s lesson… Brent is up markedly and the Brent WTI price has narrowed… Now maybe one could argue that all prices are being affected by QE3; but is it because economic growth will be stronger due to …

Also on a macro world wide basis, Oil does not affect GDP long term… (a gain in Saudi GDP offsets a loss in GDP in US, China, and other purchasers) and even in the US it is not a 1 for 1 loss… about half of our oil product consumption is from domestic sources meaning the increase stays here… and if high oil prices reduce demand while increasing production thereby reducing imports, you have all sorts of positive GDP impacts…

I was incorrect about the date of QE 1– but QE was going on from the moment crisis began as interest rates were drastically lowered and money supply added to the system so as to bail out the banks and let them rebuild capital and profits by dint of the yield curve. This process was most definitely Fed policy bigtime; it just did not go by thew name QE1. Look it up. How do you think the Fed balance sheet went from under $1 trillion in 2008 to well over $2– and now on the way to another trillion added at $85 billion a month.

Would you care to put a date on the “moment crisis began”? When did Bernanke begin accommodating the meltdown? Was it mid 2007, when oil prices were already closing in on $80 a barrel (for the second time since 2006)? Or was it in 2006, when oil prices ranged between $60-$80? Do you think the crisis explains these oil prices? Perhaps he began accommodating the meltdown well in advance of the actual meltdown, in 2005, when the price of oil first breached $60 a barrel. We can keep going back in time. We could go all the way to 1998, when oil was $10 a barrel. All you have to do is look at a chart to see that the price of oil began its meteoric rise circa 2002-2003. How does your explanatory framework make sense of these facts?

Would you care to put a date on the “moment crisis began”? When did Bernanke begin accommodating the meltdown? Was it mid 2007, when oil prices were already closing in on $80 a barrel (for the second time since 2006)? Or was it in 2006, when oil prices ranged between $60-$80? Do you think the crisis explains these oil prices? Perhaps he began accommodating the meltdown well in advance of the actual meltdown, in 2005, when the price of oil first breached $60 a barrel. We can keep going back in time. We could go all the way to 1998, when oil was $10 a barrel. All you have to do is look at a chart to see that the price of oil began its meteoric rise circa 2002-2003. How does your explanatory framework make sense of these facts?